A construction project is a complex and demanding undertaking that requires planning and co-ordination at so many levels. The project requires getting legal clearances and arrangement of resources, labour, construction material and requisite equipment’s. But despite all this organization, things can go wrong and the chance of risk cannot be undermined, which is why most contractors and builders opt for a construction all risk insurance scheme.
Key Takeaways
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Bipartite Policy Structure: A standard Construction All Risk (CAR) policy is split into Section I (Material Damage to physical site assets) and Section II (Third-Party Liability for external damage or injury).
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Strict Exclusion Boundaries: Material damage coverage explicitly excludes losses caused by faulty design, poor quality construction materials, atmospheric wear and tear, inventory missing during stock checks, and consequential financial delays.
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Insured Settlement Prohibition: Under Section II, policyholders cannot independently admit fault or agree to compensation payouts with third parties without express prior consent from the insurer, as doing so voids indemnity rights.
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Catastrophic & Intentional Exclusions: Standard policies universally exclude losses arising from war, nuclear risks, total cessation of work, willful negligence, and terrorism (unless a dedicated terrorism add-on is purchased).
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Policy Customization via Add-Ons: Gaps in baseline coverage can be closed by purchasing policy extensions for debris removal, cross-liability, surrounding property damage, and natural disasters like earthquakes.
As a building contractor, you have made a sound capital investment in a project. It IS therefore becomes imperative to take an optimum cover to protect your investment against any kind of risk, loss and damage. The policy is typically divided into two sections.
Section I:
It essentially deals with material damage and covers the physical loss or damage of property during the construction phase.
Section II:
On the other hand, section II deals with any loss, damage or bodily injury caused to a third party and extend cover against all this.
From the sound of it, constructional all risk insurance appears to be comprehensive liability insurance policy, but you must be mindful of the exclusions under the same. Generally, exclusions comes under the purview of add on features of a policy; however there are certain elements that are categorically excluded. Let’s understand some of the key exclusions that you should be aware of before taking construction all risk insurance –
General Exclusions
The insurer can reject claims with respect to any loss, damage, liability arising out of –
- War, civil war, rebellion, revolution, insurrection, mutiny, civil commotion, conspiracy, insurrection, civil commotion etc.
- Radioactive contamination, nuclear reaction and nuclear radiation
- Cessation of work
- Willful act of negligence
- Act of terrorism
Besides the above list of general exclusion there are other exclusions under the two sections of the policy.
Exclusions under Section I – Material Loss
Under section I of the policy, the insurer is not liable to pay for the following scenarios –
- Losses arising due to excess shown in the schedule
- Losses that are known at the time of taking down the inventory
- Normal wear & tear
- Gradual deterioration (rusting, scratching) or damage caused for atmospheric conditions
- Damage or collapse of property due to faulty design
- Damage or collapse of the building because repair, aesthetic rectification, restoration efforts
- Damage of the building or construction because of the use of defective or poor quality material
- Loss or damage of files, drawings, accounts, bills, money, stamps, cheques, evidence of debt etc.
- Penalties arising due to non-compliance of law, non –fulfillment of terms & condition of the project
- Consequential damages & losses etc.
Exclusions under Section II- Third Party Liability
Under Section II of construction all risk insurance, the insurer is not obliged to pay indemnity for the following scenarios –
- The Excess mentioned in the policy Schedule as it should be borne by the policyholder in the event of property damage.
- Expenses incurred by the insured in repairing or replacing anything covered under Section I of this Policy.
Condition applicable to Section II
Under no circumstances, the insured (principal contractor, sub-contractor, owner of the property or the party funding the project) can admit, offer or promise the payment of indemnity to the third-party without the consent of the insurer. All matters related to defense and settlement must be carried out in knowledge of the insurance company. This is imperative for a hassle free claim settlement process.
Add on Cover
Any discussion on exclusion of an insurance policy cannot be complete without a mention of add on cover. Also known as extension, add on covers are additional benefits that can be procured by the insured on payment of the extra premium. Under construction all risk insurance; the following extensions are available –
- The cost of removal of debris
- Liability arising due to the loss of damage of surrounding property
- Any kind of cross Liability
- Loss of property due to strike, civil commotion & Terrorism
- Any kind of extended maintenance work
- Loss of damage due to rectification or restoration work
- Loss or damage of property due to earthquake and terrorism
Summary Table: Structural Architecture & Exclusion Rules of CAR Insurance
The exclusion mentioned in this write-up is not an exhaustive list. For a detailed understanding, you must consult the insurer. As it is important to know what is included in the policy, it is equally important to understand what is not. Construction projects are capital intensive undertaking and therefore contractors or those involved with the project must take comprehensive coverage that gives them maximum protection in case of unforeseen circumstances. However, to make the most out of the policy, it is imperative to understand what is not included in the policy so that at the time of claim, the insurer doesn’t reject your claim because you were not aware of the exclusion while taking the policy. Therefore, it is better to be prepared for all contingencies, and being aware of the ins and outs of your policy is crucial for that.
Frequently Asked Questions (FAQs)
1. What are the main sections of a Construction All Risk (CAR) insurance policy?
A) A CAR policy is divided into two primary sections: Section I covers material damage to the physical construction site, machinery, and raw materials; Section II covers third-party legal liabilities for bodily injury or surrounding property damage caused by site operations.
2. What common material losses are excluded under Section I of a CAR insurance policy?
A) Section I typically excludes damages caused by faulty engineering design, defective construction materials, gradual atmospheric wear and tear, inventory shortages discovered during routine stock-taking, financial penalties for contract delays, and consequential losses.
3. Why is admission of liability prohibited under Section II of a CAR policy?
A) Under Section II, contractors must not admit fault, make financial promises, or settle claims directly with third parties without the insurer’s formal consent. Unauthorized settlements bypass the insurer’s legal defense protocol and can lead to claim repudiation.
4. Are acts of terrorism and natural disasters covered under a standard CAR policy?
A) Acts of terrorism, war, nuclear hazards, and certain natural catastrophes are typically listed under general exclusions. However, contractors can cover these risks by purchasing specific add-on riders like Terrorism Cover or Earthquake Extensions for an additional premium.
5. How do policy add-ons enhance a Contractor’s All Risk insurance policy?
A) Policy add-ons extend baseline coverage to absorb costs that standard policies exclude, such as debris removal expenses, damage to surrounding property owned by the principal, extended post-handover maintenance, and cross-liability between multiple contractors on the same site.
About The Author
Pankaj
MBA Insurance and Risk
With seven years of expertise in the insurance sector, Pankaj is a seasoned authority in Construction All Risk (CAR) insurance. As a dedicated contributor to SecureNow’s blog and article platform, they adeptly unpack the intricacies of CAR policies. He is deeply committed to empowering construction professionals with comprehensive insights into risk mitigation and coverage nuances. Their proficiency in navigating insurance landscapes ensures readers receive current and actionable guidance. Pankaj‘s passion for fostering understanding and resilience within the construction industry has firmly established them as a trusted source of knowledge and support.
